You’ll hear it tossed around here and on just about any other site: Build your passive income through real estate!
I believe passionately that you can make a ton of money in just about any niche in real estate. But let’s be real—the way most people invest is hardly passive at all.
A lot of very successful people I know jump into real estate and buy some rental property. Or even worse, they pick up a deal to flip. It’s too late before they realize that it’s far more work than they expected.
Then they’re calling me asking how they can get out of the deal without losing money. Unfortunately, it’s pretty rare that someone can get out of an unfinished project without losing money. It’s even harder to get out of a rental property that they overpaid for, thinking they’d make a smooth 10 percent cash-on-cash or more with no work at all.
So, before getting your first deal, look at your current situation, your goals, and decide how passive you need to be with your investments. Then, be real with yourself and understand what you’re getting into.
Let’s dive into some types of real estate that are and are NOT passive.
3 Real Estate Strategies That Are Not Passive
You should avoid these categories if you are looking to park some money in real estate and if you want to stay passive so you can focus on your other business, career, etc.
On the other hand, if you have less money but more time, these might be good categories to get involved in. Essentially, you’ll be trading your time for higher returns, which can be very helpful to newer investors.
1. House Flipping
The first and most obvious type of “investing” that is not passive is house flipping. There are a ton of people absolutely killing it as house flippers, but I personally don’t even consider this investing. Still, it’s commonly referred to as investing, so I’m including it.
If we could compare real estate to the stock market, then house flippers would be the day traders or swing traders. Swing traders and house flippers both make a lot of money, but it’s hardly an investment.
Just like day traders are taking advantage of short-term fluctuations in the market to make money, house flippers are taking advantage of inefficiencies in the market, bringing a lot of experience to plan and oversee a project, then selling for (hopefully) a profit.
Unless you are an owner of a house flipping company that operates completely and entirely without your direction, then your money from house flipping is not passive.
This is just about as far away from investing as you can get. Wholesalers try to find and negotiate really good deals, then sell that contract to a house flipper or landlord.
Though I do know people making $50K/month wholesaling, it can hardly be called passive. They work a lot of hours, are constantly driving around looking at deals, and spend a lot of time marketing.
So, while it can be very lucrative, it is not passive.
3. Rental Property
The other most common investment people make is either in a single family or 2-4 unit multifamily rental property.
Though these can be entirely passive, for most people, I’d consider it partially or even slightly passive. That’s because most people are either managing it themselves or very active in the management of the property.
And, that’s the distinction—managing a property is not passive. In fact, management is quite literally a job, and you can apply to be a property manager in just about any market in the country.
So, while this can be passive, the majority of people are managing their own properties, doing some odds and ends to maintain it, and bumping up their income and returns in the process.
4 Real Estate Investments That Are Passive
Alright, let’s flip things around and look at some ways to invest that are mostly or almost entirely passive.
1. Rental Property
Like I already mentioned, rental property is usually a semi-passive investment. But if you do it right, it can be mostly passive.
Pros: With a little bit of effort up front, you can receive the dividends for decades.
Cons: You’ll have to shop for and find deals, which can be time-consuming. You’ll also have to analyze all the deals, negotiate with the seller, and probably line up contractors for any major repairs. But, you can hand the property over to a management company and let it cash flow for years to come.
2. Private Lending or Partnering
Instead of being actively involved in house flipping or buying a rental property, you can be a private lender or equity partner.
Pros: Essentially, you are letting other people do all the work involved with finding deals, lining up projects, and filling apartments, but you get to earn some of the profits. All you have to do is vet the investor and underwrite the deals to make sure it makes sense.
Cons: You’ll experience lower returns and give up some control.
Though there is less return, the amount of work involved is minimal. The investor might have to look through 50 deals before finding a good one to bring to you. You might look at two or three deals before agreeing to one.
3. Partnering on a Syndication
One of the most passive forms of investing is to build some relationships with syndicators, get on their email lists, and wait until a deal pops up. You can then invest with them on the deal and start earning with doing hardly any work.
Pros: Non-accredited investors can partner. Deals are generally for larger properties, so there are economies of scale.
Cons: You generally need to have a personal relationship with a syndicator to invest. Also, the SEC limits the number of non-accredited partners to 35 or less.
This is the newest player on the block. Essentially, crowdfunding is exactly like syndicating, except investors are found online.
Pros: The crowdfunding platform does extra diligence, which means you can trust the deal a little bit more than normal.
Cons: There are lower returns than investing straight in a syndication due to the extra fees they place on the deal. Also, the SEC allows only accredited investors to invest in individual assets that are crowdfunded.
So, Is Real Estate Actually Passive?
Yes and no.
No, because the way most people are investing is not actually passive.
But if done right, real estate can be truly passive and help you build massive generational wealth over a lifetime.
So, before diving in, make sure you know what niche in real estate you want to get into, how passive it is, and how it fits into your personal goals.
What’s your favorite niche? How much effort does it require?
Leave a comment!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.